Stock market investors seem to like the FTSE 100 to keep climbing, year after year. I understand that, as it helps keep the stress away. And who wouldn’t like to see the value of their shares increasing slowly and steadily?
However, the Footsie has tested investors’ nerves in 2022, and has essentially gone nowhere over the past five years. But I reckon current conditions could make this one of the best times to invest in FTSE 100 shares ever. Here are several reasons.
Cash returns
We might be feeling the financial pinch in our everyday lives. But FTSE 100 companies appear to be awash with surplus cash. And they’re handing it back to shareholders.
According to investing services provider AJ Bell, 2022 might even turn out to be the best year ever for cash returns from lead index companies.
In 2018, the stocksgenerated a total of £85.1bn in dividend payments, which is the highest ever. It looks like 2022 will come in a bit short of that, but it should be close. And for shares that are down, we’re looking at some unusually high yields.
On top of dividends, this year is also in line to hit an all-time record of more than £50bn in share buybacks.
Valuation
On a price-to-earnings (P/E) basis, FTSE 100 shares look unusually cheap now. The long-term average P/E ratio is around 14-15. But for much of 2022, the forward P/E has been around 10-11. And even with the best optimism, I can’t see it ending the year any higher than around 12.
There are some very low individual valuations too. The hard-pressed financial sector, for example, is showing some very low P/E multiples, like Barclays on 5.3 and Legal & General on 7.4. But even companies not under pressure are lowly valued, like Imperial Brands on a P/E of 9.4.
Will these stocks get back closer to their long-term averages? If they do, this could be a great time to buy them.
Recession
Why might recession be good (at least for investors)? It’s because we always overreact. I don’t like buying shares in bullish times, because I’m worried they’re overvalued.
If investors had access to all information about all stocks, and always acted fully rationally, everything would always be fairly valued. It’s a thing called the efficient market hypothesis.
But we don’t know everything. We don’t always act completely rationally. And the efficient market thing is nonsense. In reality, we invest based on partial understanding, sentiment, gut feeling, and all sorts of human traits.
And that’s why when sentiment is bearish, I reckon many good shares can be seriously undervalued.
Fear and greed
Ace investor Warren Buffett reckons we should be greedy when others are fearful. And when others are panic-selling at low prices, we should happily buy up all we can.
I’m not sure how long the current investing gloom might last. We might be in for a couple of years of recession, so there’s short-term risk. But a lot of FTSE 100 share prices have already started ticking up as we approach 2023.
